Tensions are rising globally, financial markets are a battleground and emerging markets are
back in the firing line. Whether it is the threat of a global
trade war, a stronger US dollar, higher borrowing costs or risk aversion on the rise, it is taking its toll on asset allocation as investors take fright on emerging market trades.
With question marks already raised about the end of the road for the global equity rally, investors are pulling in their horns and peripheral trades like emerging markets are feeling the strain.
Ever since US President Donald Trump fired the first shots in his growing trade dispute with
China and
Europe, emerging markets have felt profound shock waves. These markets are deeply dependent on buoyant world trade, so anything which casts doubt on the future health of global growth is bound to go down like a lead balloon. Investors are suddenly losing faith in the “Goldilocks” formula of low interest rates, benign inflation, brisk growth and a never-ending stock market bonanza.
Market confidence will progressively worsen the longer the uncertainty persists over Trump’s trade policy intentions. In the worst-case scenario, the present crisis could end up a precursor to a full-blown trade war. Selective tit-for-tat measures between the US and its trade competitors are one thing, but the imposition of sweeping, wholesale sanctions would be a massive game-changer. Emerging markets risk being crushed in the middle.
Emerging markets have enjoyed a joyride in the past few years as global growth rallied in response to highly expansionary monetary policies in the major economies. A decade of near-zero interest rates and all the loose money generated by
quantitative easing programmes in North America,
Europe and
Japan have been a once-in-a-lifetime boon for emerging markets as world trade growth bounced back from extremely depressed levels after the
2008 crash.
Emerging markets have piggybacked off a global trade revival which saw annual growth in world export values bouncing back by as much 13 per cent year-on-year by the end of 2017.
